Unleashing the Power of the Private Sector in Africa1

Unleashing the Power of the Private Sector in Africa: Prospects, Constraints and

Solutions

Reflections and Big Ideas

13 March 2014

Michael King

Unleashing the Power of the Private Sector in Africa

Outline

Reflections and Some Big Ideas1. Access to Loans2. Market Access3. Corruption and Rule of Law

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Unleashing the Power of the Private Sector in Africa

1. Why is Access to External Finance so Important?

• Funds needed for investment in technology, buildings, land and human capital to: – Exploit new markets– Enhance productivity– Develop new products– To stand still in challenging times.

• Internal resources for investment generally modest (except for large firms); constrained by cash flow issues.

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Unleashing the Power of the Private Sector in Africa

1. Access to Finance in Africa: Enterprise Access to Loans is Low

4Source: Beck et al. (2011)

Unleashing the Power of the Private Sector in Africa

Traditional View of Banking in Africa

• Dominated by government-owned banks in the 1980s and subject to restrictive regulation.

• 3633 Formation: Traditional View of Africa banks– Give 3% on deposits– Get 6% return on government bonds– Leave at 3pm – Let people wait in line for 3 hours

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Unleashing the Power of the Private Sector in Africa

Good News: Financial Sector Deepening in Africa Since 2005

6Source: Beck and Cull (2013)

Unleashing the Power of the Private Sector in Africa

Kenya: Expansion of Branch Networks

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Source: King. (2012)

Unleashing the Power of the Private Sector in Africa

Issues on Demand Side

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Small number of firms with loans

Source: Beck et al. (2011)

Unleashing the Power of the Private Sector in Africa

Issues on Demand Side

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Small number of firms with loans

23% of firms with no loans were refused

Source: Beck et al. (2011)

Unleashing the Power of the Private Sector in Africa

Issues on Demand Side

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Small number of firms with loans

23% of firms with no loans were refused

Almost 60% of firms that did not apply need a loan

Source: Beck et al. (2011)

Unleashing the Power of the Private Sector in Africa

Issues on Demand Side

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Small number of firms with loans

23% of firms with no loans were refused

Almost 60% of firms that did not apply need a loan

Specific issues in Africa

Source: Beck et al. (2011)

Unleashing the Power of the Private Sector in Africa

Evidence on the Supply Side

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Source: Beck et al. (2011)

Unleashing the Power of the Private Sector in Africa

Big Idea 1: Mobile Phone Lending• M-Shwari (Kenya)

– Can earn interest on your saving balance.

– Instant access to loan (€1.10 maximum €180) with an interest rate of 7.5% for 30 days.

• Mobile lending has the potential to underpin small business development in Africa.

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Unleashing the Power of the Private Sector in Africa

Big Idea 2: Psychometric Testing of Entrepreneurs

• Used for pre-employment screening worldwide

• Why not use for loan approvals in areas where there are issues with collateral?

• Currently used by:

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Unleashing the Power of the Private Sector in Africa

2. Market Access: EU Trade Policy

• Tariff free access into EU under different preferential agreements

• But African export performance to EU has been modest.

• Possible EU policy related reasons: – Strict rules of origin– Technical barriers to trade– Insufficient Aid for Trade

• And among the African reasons: – Security and bureaucratic cost of exporting– Relative price declines for exported goods– Challenge of developing diversified export bases.

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Mombasa Port: Badly run, significant

corruption and in need of modernisation

Unleashing the Power of the Private Sector in Africa

Big Idea 3: Simplified and Meaningful Regional Trade Agreements

• Benefits of Regional Trade Agreements1. Larger markets supports competitiveness (economies of scale) 2. Reduce tariff barriers and the cost of crossing borders3. Help attract investments4. Raise bargaining power at the level of international trade

negotiations5. Promote regional stability6. Help landlocked countries

Not a new idea: A number of free trade areas have been agreed but most have not been implemented yet.

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Unleashing the Power of the Private Sector in Africa

Current Patchwork of Regional Agreements in Africa

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Unleashing the Power of the Private Sector in Africa

3. A story to share.....• Meet my friend – Joseph!• Joseph moved to Nairobi in his

20s in the 1980s. • He started as a taxi driver sharing

a car with a friend of the family. • Joseph then started his own taxi

business. • At one point he built up a fleet of

12 cars.• However, he decided to scale

back his business and now has 4 cars. Why?

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Unleashing the Power of the Private Sector in Africa

The story unfolds: 1. As Joseph’s cars became more apparent on the streets

of Nairobi the police started hassling his drivers for money to operate. On occasion the police would visit his office demanding money.

2. The Nairobi taxi mafia started to have a big problem with the growth of his business. His cars would be vandalised and damaged by other taxi drivers (on orders from their bosses).

Joseph eventually choose the easy life – to operate under the radar of the authorities and the taxi mafia.

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Unleashing the Power of the Private Sector in Africa

Simple HypothesisGovernment Corruption

+ Disapproving Local Mafias

= Additional ‘costs’ of Ambition for an African

Entrepreneur (Disincentive)

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Unleashing the Power of the Private Sector in Africa

Big Idea 4: Improve Govt. Institutions and the Rule of Law

Simple HypothesisGovernment Corruption

+ Disapproving Local Mafias

= Additional ‘costs’ of Ambition for an African

Entrepreneur (Disincentive)

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